Microsoft is developing a worrying habit of neglecting its hardware products.

Microsoft's third-quarter financial results were published yesterday, and they had many high points: cloud revenue is growing well (though we have some misgivings about how the numbers are reported), Windows outperformed the PC market, and Office 365 passed 100 million corporate seats. But there were a couple of significant black marks: Phone revenue has dropped to effectively zero, and Surface revenue was down sharply year on year, with a 26-percent drop in revenue.

The phone revenue is no big surprise: Microsoft has all but abandoned the market, and the last phones to sport a Microsoft logo—the Lumia 950 and 950 XL—are no longer sold. The company has been winding down its phone operation, writing off the entire value of the phone business it bought from Nokia and laying off thousands of former Nokia employees in the process.

But the story with Surface is more unsettling. In its analyst call, Microsoft ascribed the drop in Surface revenue to "product end-of-lifecycle dynamics," whatever that means. The company's 10Q filing used rather clearer language: Microsoft simply didn't sell as many Surface systems.

The Surface range has two main products: the Surface Pro 4, a tablet-style two-in-one, and the Surface Book, a laptop with a detachable screen. These systems were launched in November 2015. The Surface Pro 4 available today, about 18 months later, is unchanged. Surface Book has been slightly updated—a variant with a better GPU was added in November 2016. But it, too, is little altered.

These portable systems were joined late last year by the Surface Studio, a fascinating but flawed desktop system. With its high price—it starts at a dollar shy of three thousand bucks—and niche utility—it's compelling if you're in the market for a Wacom digitizer, but otherwise something of a curate's egg—Surface Studio is not designed to be a big seller with mainstream appeal. Microsoft didn't offer numbers, but we'd imagine that the majority of Surface sales are of the portables.

The march of technology

Eighteen months is a long time to wait for systems to be refreshed. The Pro 4 and Book were early adopters of Intel's Skylake processors, but Skylake is now a generation old. Kaby Lake, which started shipping last autumn, is not a huge advance over Skylake, but it's a more power-efficient design that offers meaningful improvements in battery life, improved encoding and decoding support for 4K video, and, for the low-power Y-series parts, meaningful improvements in performance.

Surface Pro 4 uses a Y-series part in the cheapest model, and it would stand to make big gains from a Kaby Lake upgrade. Microsoft wouldn't even have to do much work to make such a switch; Kaby Lake is pretty much a drop-in replacement for Skylake.

The last 18 months have also seen significant growth in the adoption of USB Type-C and Thunderbolt 3, which offer standardized single-cable charging and docking. While Thunderbolt 3 is still young, hardware companies are experimenting with concepts such as Thunderbolt 3 monitors that charge laptops over the same cable used to carry the display signal, external GPUs, and docking stations that are no longer specific to particular hardware models (or even OEMs). Indeed, it feels like a natural fit for a revised version of the existing Surface Dock, or even, dare we dream, a standalone version of the mouth-wateringly beautiful touch screen of the Surface Studio.

USB Type-C is rapidly gaining adoption; it has already become the norm for phone charging (for Android, at least) and increasingly is being favored for laptop charging. The slimline ports enable thinner PCs, and the ability to use a single port for power, USB connectivity, and video output is compelling.

No Surface product supports either technology. The Surface portable line-up, the bread and butter of the Surface brand, is looking very neglected.

Further Reading

At their release, the Pro 4 and Book were both arguably class-leading machines: 18 months later, they look sad and stale. Last November, we felt that we couldn't recommend the Surface Book's version with the updated GPU to most buyers—we couldn't justify buying a Skylake system with Nvidia 900-series graphics when the state of the art was Kaby Lake and 1000-series GPUs. Six months later, the machine looks even less appealing.

With this stagnation, falling sales are inevitable. Until Microsoft shows the brand some love, the decline will only continue. We're not expecting to see that love any time soon, either; the company's guidance for the current quarter is that Surface sales will continue to fall. Microsoft is holding an event next week, and we expect there to be some hardware element, but we've also heard from sources close to the matter that there won't be updates to the Surface Pro or Surface Book.

Either do hardware properly, or stop pretending

If Microsoft wants to make PC hardware, it needs to do so properly and commit to the same kinds of updates as other PC OEMs.

Almost every other PC OEM has refreshed its systems for Kaby Lake. Almost every other PC OEM has adopted, at least for machines in the premium space that Surface occupies, USB Type-C and Thunderbolt 3. Surface Pro—a machine which, in its early generations, arguably defined that particular style of two-in-one systems—is no longer unique. HP, Dell, Lenovo, Samsung, and others all have solid two-in-one offerings. These machines are modeled after the Surface Pro concept, but they now embody that concept better than Microsoft's own system. The Surface has been out-Surfaced.

The failure to do anything with Surface for so long makes us wonder just what Microsoft is up to. If the company is serious about its hardware ambitions—and officially, at least, it still says that its intent is to produce market-leading systems under the Surface brand—then it has to take its hardware seriously. That means refreshing it to keep pace with the competition.

Further Reading

One hardware company has a similarly lackadaisical approach to updating: Apple. In recent years, refreshes of Mac laptops and desktop systems across the lineup have slowed down. While the company has been quick to pick up Thunderbolt 3 and USB Type-C on at least some of its machines, the broader failure to keep pace with the state of the art is a continued source of frustration for Apple loyalists. But Apple's hardware sales remain robust, because Apple, in a very important way, is not like Microsoft or any other PC OEM: if you want to run macOS in a legal and supported way, you simply have no option but to buy Apple hardware.

There's no corresponding necessity when it comes to buying Surface. Microsoft is but one Windows OEM of many, and if Microsoft's hardware isn't offering the right feature mix, a system from HP or Dell or Lenovo or Samsung or some other company probably will. It's fine for Microsoft to take inspiration from Apple's close cooperation between hardware and software development; it's not fine for Microsoft to mimic Apple's unpredictable and inconsistent system refresh policies. The PC market dynamics don't allow it.

Enlarge/ Instead of a full refresh, Microsoft released the Surface Book with Performance Base. The base is a little fatter, its battery is bigger, and its GPU is faster.

Peter Bright

When Microsoft first started making hardware, there was widespread uncertainty as to what the company was hoping to do. General consensus was that Redmond's aim was to serve as a kind of trailblazer, building the kinds of systems that the company wanted to see in the world while pushing the PC market in the direction it wanted.

But this kind of hobby approach is a problem. Without assurances of a long-term commitment to hardware development, many would-be customers will avoid the systems. This is particularly acute in the corporate space: support lifecycles and extended system availability are essential when buying a fleet of systems. Microsoft recognized this concern and took action to address it. Surface systems were offered through the usual corporate channel partners like Ingram Micro and through cloud subscriptions, and the company promised that Surface Pro 3 peripherals would remain compatible with Surface Pro 4.

The message was clear: Microsoft wasn't merely dabbling in hardware, it was investing in building a serious hardware brand. After some early missteps, the hardware was solid and well-received, revenue grew steadily, and Surface looked like it was becoming an integral part of Microsoft's ecosystem.

That feels like it's now in jeopardy.

Troubling precedent

It doesn't help that Microsoft's hardware track record is more than a little shaky, and skepticism about its commitment and seriousness to hardware is well-earned. After a difficult start, Windows Phone was finally on an upward trajectory, especially in the EU where, in some countries, it had broken double-digit market share. But lackluster hardware—including a complete failure to offer a competitive new flagship phone in 2014—and lack of clear messaging saw a complete reversal of fortunes. The ultimate result was felt this quarter: Phone revenue is now essentially zero, even as work on the mobile version of Windows 10 continues.

Enlarge/ The last high-end phones Microsoft released were the Lumia 950 (pictured) and 950 XL, which came out in November 2015.

Peter Bright

Surface RT and Surface 2, Microsoft's ARM-based two-in-one machines, similarly raise questions about the company's commitment to hardware. Although Windows 10 itself has been built for ARM systems (and a version of Windows 10 for ARM is on the market in the Internet of Things guise), Microsoft opted not to offer a Windows 10 upgrade for Surface RT or Surface 2. This leaves the machines basically orphaned.

Microsoft's inaction has taken a promising prestige PC brand and turned it into a borderline embarrassment. The question of whether Microsoft cares about hardware and is in it for the long haul is once again a live one. We've seen similar levels of neglect before. It was ruinous for the Nokia phone business and devastating for Windows Phone. Windows on the desktop is, of course, going to prove more robust—it doesn't live and die on the fortunes of Surface in the way that Windows Phone hinged on Nokia and Lumia. But everything invested in building the Surface brand is now in doubt.

That's bad for anyone who likes the machines, including those corporate buyers who have made the leap to Microsoft hardware. It's even worse for the software company's future ambitions: later this year, we're going to see a new generation of ARM machines running Windows. But with the way the company has treated its other hardware endeavors, who would want to take the gamble? Microsoft has developed a habit of ignoring and abandoning its niche hardware platforms; what reason is there to believe that Windows 10 for ARM will be any different?

If the hardware wasn't profitable (which it is) I would understand, but seriously what gives?

The Surface hardware isn't as much as a commodity as cell phones are. They're great devices, but once you have one, what's the point of updating from one generation to the next? Mine still works just as great as when I bought it.

Peter, why are you acting like this is remotely new or surprising behavior? The Zune, the Kin, the ARM-powered surfaces... MS leaving a product line out to dry is the norm. The surface line was the exception until now.

If the hardware wasn't profitable (which it is) I would understand, but seriously what gives?

It's possible that Microsoft believes they accomplished their goal of showing the world what a high quality Windows laptop/hybrid and tablet should be, and prodded the OEMs to get their shit together or MS would eat their lunch. And then Dell made the XPS line, HP made their very good tablet, and other OEMs followed suit with their own premium offerings. So now that Microsoft has demonstrated that it isn't just Apple that can make a premium feeling portable device, they no longer need to spend R&D on it now that other companies have picked up the torch and ran wit it.

I still want another iteration of the Surface Book, because I would love to buy one.

The Surface RT and Surface 2 were never intended for corporate use. Neither could be domain joined and the constrained desktop was far too limited in purpose. Full Windows 10 and Windows Server running on ARM, now that could be another story...

As someone who runs an older Surface and wants so badly to upgrade, the refresh delay is immensely frustrating. I've thought about switching to a clone, but I'm not sure any of these clones will be crapware free and have good pen-input.

The SP4 launch was... troubling, from a hardware perspective. It was pretty clear that it needed a few more months in the oven before release. I had to go through 3(!) before I got the one I have today.

Now, I want to emphasize: my Surface is the first computing device I've had in a long time that I genuinely felt was a leap forward across the board. I love the thing, and it works better today than it did at launch.

But I am quite certain that Microsoft took a hit in both reputation and profit from the too-early release. And honestly, I felt that their Surface Book was a misstep. They shouldn't have made another different-but-very-similar tablet, and they should have left the kickstand. Wanting a stiff hinge and a better keyboard doesn't remove the usefulness of tilting back and writing. They should also make it so that you can use the keyboard even when it isn't attached. When writing/drawing on a tilted Surface, a keyboard off to the side would be a lot more useful.

(think Photoshop with pen in right hand, left hand using keyboard shortcuts)

So (and I realize this may be wishful thinking) I hope they're taking the time to get all their ducks in a row before the next round. The Surface line is a delight to use, and I want to see it grow.

Since Nadella took over the hardware has been fading into the background. I wouldn't be surprised if they don't discontinue everything, except the Xbox line, this year. Who knows, they may even spin off the Xbox division into its own company.

Both Microsoft and Google are guilty of this. Google bought Motorola, made some excellent phones that were truly groundbreaking (best bang for the buck, very light skin, good build quality, etc), then dumped it a couple years later. I was dumbfounded.

Microsoft was finally getting traction with their phones, and the Continuum concept was very exciting. If they'd kept up at it for a few more years, I think they could have made some good progress - they were actually starting to gain momentum. They they just decide to cancel it all, jeopardizing not just the phones, but the whole concept of a single "account" that can be used seamlessly with hardware from a workstation down to a phone. Serious WTF.

And now they are creating uncertainty with their laptop/tablet line.

It's frustrating when you see so much awesome potential just being flushed down the toilet.

If the hardware wasn't profitable (which it is) I would understand, but seriously what gives?

It's possible that Microsoft believes they accomplished their goal of showing the world what a high quality Windows laptop/hybrid and tablet should be, and prodded the OEMs to get their shit together or MS would eat their lunch. And then Dell made the XPS line, HP made their very good tablet, and other OEMs followed suit with their own premium offerings. So now that Microsoft has demonstrated that it isn't just Apple that can make a premium feeling portable device, they no longer need to spend R&D on it now that other companies have picked up the torch and ran wit it.

I still want another iteration of the Surface Book, because I would love to buy one.

I agree with this. Microsoft has always been a software company and it is a conflict to those who sell hardware supporting their software to be in this business. They've shown what is possible and now can back off.

The phone is a different story because the hardware and software were tied together and they are abandoning both. But there are plenty of window tablets, convertibles, etc. for Microsoft to be happy.

I loved my surface until I dropped it. Then the digitizer broke, like so many did at my school the first time anyone drops them. Too expensive to fix, so its just now a terrible laptop (won't stay open on its own) with a terrible keyboard (trackpad too small, etc.) My next computer will be something like the Yoga-like XPS13. Less expensive and more functionality. I never took the keyboard off my surface.

If the hardware wasn't profitable (which it is) I would understand, but seriously what gives?

It's possible that Microsoft believes they accomplished their goal of showing the world what a high quality Windows laptop/hybrid and tablet should be, and prodded the OEMs to get their shit together or MS would eat their lunch. And then Dell made the XPS line, HP made their very good tablet, and other OEMs followed suit with their own premium offerings. So now that Microsoft has demonstrated that it isn't just Apple that can make a premium feeling portable device, they no longer need to spend R&D on it now that other companies have picked up the torch and ran wit it.

I still want another iteration of the Surface Book, because I would love to buy one.

I respectfully disagree - technology doesn't stand still. Between new materials, continuing miniaturization, VR, etc there is always room for innovation. Furthermore, the PC market is probably even more in need of guidance than ever. 10 years ago, it was simple - you had desktops, and you had laptops. Nice and tidy. Now there is a continuous spectrum of devices from desktops to watches, and more ways to interact with devices (haptics, crazy screen formats, voice, VR, screens separated from processing, etc) and the market can use some guidance to organize around.In any case - it isn't really a zero-sum game if Microsoft can introduce new concepts to get people excited about hardware (like they did with the Surface series). Everyone wins in that scenario - OEMS, and consumers, and more new hardware = more lock-in and licensing for Microsoft.

No mention of Surface 3? Also an orphaned product, in that the WiFi version (which I have) was released in Q2 2015, and after the LTE version (Q3) - nothing. They aren't available from the Microsoft store any more

If I recall correctly, Intel pulled Atom, but should that have completely killed the formfactor?Surface 3 has a 1600MHz Cherry Trail 14nm, which doesn't seem all that special 2 years later.

It's beyond me why they have such a confused and unclear stance with Windows Phone. This ship sailed long ago, and the revenue has gone to basically zero. Write this thing off, shut it down. Focus on getting a "Microsoft Edition" of a couple flagships a year, such as the S8, and strip them of carrier junk but preload the Arrow Launcher, maybe the MS lock screen, and Office. Pretty much just the Microsoft vision of Android. Really this is what they need to do, not continue to develop Windows Phone when there's no hardware being sold.

I'm personally a fan of Microsoft's forays into hardware. I've owned 4 separate Windows handsets and two Surface Pro tablets (and am currently still actively using the Pro 4). I loved what they were doing with Windows Phone/Windows 10 Mobile, and the Surface line seemed without serious fault of late.

However, Microsoft's fumbling of the phone market, and their apparent now fumbling of the Surface line, is very distressing to me. I love what they made, even if they didn't achieve a large market share. I have an Android phone now but still keep around my Lumia 950 for a couple Windows-only apps I like, at home (imagine that!). The Surface Pro 4 is great, though it is dated.

It just seems like absolute incompetence from the top at Microsoft. But then again, this is the same old story for them. The only long-term commitment they seem to be able to keep is the Windows and Office product lines. With the possible exception of Xbox (we will see, though it is amazing it survived this long), everything else they do gets introduced with great fanfare and claims that it's "the future", only to be dropped in favor of something else a couple years later. They need to figure out how to keep a long-term vision. If not for Office and Windows, they'd have failed a long time ago.

Since Nadella took over the hardware has been fading into the background. I wouldn't be surprised if they don't discontinue everything, except the Xbox line, this year. Who knows, they may even spin off the Xbox division into its own company.

In my humble opinion, Nadella is a short-sighted idiot akin to HP's Apotheker. Microsoft needs to continue to invest in hardware at least to maintain a healthy ecosystem for the software to live in. It's not all just about the "cloud".

Both Microsoft and Google are guilty of this. Google bought Motorola, made some excellent phones that were truly groundbreaking (best bang for the buck, very light skin, good build quality, etc), then dumped it a couple years later. I was dumbfounded.

Microsoft was finally getting traction with their phones, and the Continuum concept was very exciting. If they'd kept up at it for a few more years, I think they could have made some good progress - they were actually starting to gain momentum. They they just decide to cancel it all, jeopardizing not just the phones, but the whole concept of a single "account" that can be used seamlessly with hardware from a workstation down to a phone. Serious WTF.

And now they are creating uncertainty with their laptop/tablet line.

It's frustrating when you see so much awesome potential just being flushed down the toilet.

Not saying google doesn't have a history of abandoning stuff, but Motorola isn't the best example. From the beginning their intention with Motorola was to build it up to a state that they can sell it, while keeping all the patents to themselves. They had no interest in keeping Motorola long term. It was the patents they were after.

That they sold it to Lenovo really made me sad. They went from making some nice phones, that were updated regularly to absolute and utter crap. I bought one shortly before they announced the sale because Motorola had become so good with updates. And that immediately went to crap.

Microsoft just seems like their an actual life Producers. Their spring time for Hitler just keeps on succeeding so they have to just give up before anyone catches wise that it was all just an elaborate troll.

Peter, why are you acting like this is remotely new or surprising behavior? The Zune, the Kin, the ARM-powered surfaces... MS leaving a product line out to dry is the norm. The surface line was the exception until now.

That's different, those products weren't successful. Surface is more akin to IE6 and Windows CE — cases of Microsoft making a winning product and abandoning it.

Hardware is usually a lower margin business than software. Any business has a learning curve. The idea in the media that any company can jump on what is trendy and expect to succeed rarely proves out in practice. Microsoft has done much better than average with Xbox. But even Xbox has not been of central importance to Microsoft's business. The better question would be why has Microsoft wasted energy on products like phones and laptops that had little prospect of success? Microsoft's big prospect is building on its business software by offering software as a service that supports it user's needs as they continue to develop. Business use of software will continue to be an important part of the economy. Microsoft should be focusing on that business where it is positioned to lead and not on the many trendy tech efforts where its best hope is to be me too.

Now, perhaps you meant was "Microsoft wasn't a personal computer manufacturer until 2012", which would be a more reasonable claim.

Sidewinder Joystick was the shit back in the day. I had a first gen and used it until PC's stopped shipping with gameports in the back. The 2 had that gross rubber coating that seemed to come off whenever you tried cleaning it, but was otherwise also excellent.

Both Microsoft and Google are guilty of this. Google bought Motorola, made some excellent phones that were truly groundbreaking (best bang for the buck, very light skin, good build quality, etc), then dumped it a couple years later. I was dumbfounded.

Microsoft was finally getting traction with their phones, and the Continuum concept was very exciting. If they'd kept up at it for a few more years, I think they could have made some good progress - they were actually starting to gain momentum. They they just decide to cancel it all, jeopardizing not just the phones, but the whole concept of a single "account" that can be used seamlessly with hardware from a workstation down to a phone. Serious WTF.

And now they are creating uncertainty with their laptop/tablet line.

It's frustrating when you see so much awesome potential just being flushed down the toilet.

It's beyond me why they have such a confused and unclear stance with Windows Phone. This ship sailed long ago, and the revenue has gone to basically zero. Write this thing off, shut it down. Focus on getting a "Microsoft Edition" of a couple flagships a year, such as the S8, and strip them of carrier junk but preload the Arrow Launcher, maybe the MS lock screen, and Office. Pretty much just the Microsoft vision of Android. Really this is what they need to do, not continue to develop Windows Phone when there's no hardware being sold.

You should have seen how excited our CIO was about the possibility of having a homogeneous fleet of devices that could all share user licenses and be managed through AD. It was one of the few things that would truly get him to light up and get excited. It would have been the perfect follow-on the Blackberry - secure, easy to manage, modern hardware and OS, and excellent integration with corporate software.

Any CIO/Tech director I've spoken to at the time was raving about this possibility. The Second Coming was probably less exciting for them than this.

I have a SP4 and I am still very happy with it. When I move on, if there is no Surface Pro 5 (or 6) then I will still have very good 2 in 1 options from Dell, HP and Lenovo. This was not true when I first purchased the SP4. If one of the goals of the SP line was to create a space in the market for this kind of device, then I think it has succeeded.

It's beyond me why they have such a confused and unclear stance with Windows Phone. This ship sailed long ago, and the revenue has gone to basically zero. Write this thing off, shut it down. Focus on getting a "Microsoft Edition" of a couple flagships a year, such as the S8, and strip them of carrier junk but preload the Arrow Launcher, maybe the MS lock screen, and Office. Pretty much just the Microsoft vision of Android. Really this is what they need to do, not continue to develop Windows Phone when there's no hardware being sold.

I really don't think anyone wants a Microsoft Android phone. Heck even if they had one it would probably never be updated.

Peter, why are you acting like this is remotely new or surprising behavior? The Zune, the Kin, the ARM-powered surfaces... MS leaving a product line out to dry is the norm. The surface line was the exception until now.

According to a couple friends of mine that've worked at Microsoft, it's an open secret that the company is riddled with organizational cancer at the management/executive levels. Tons of backstabbing and cross-project undermining so VPs can try and shuffle themselves into preferred status.

This applies double to large hardware projects that could disrupt the balance of internal power, so existing project heads gang up to strangle these projects in their infancy.

My personal opinion is that having 1st class hardware has made Microsoft pay more attention to the real world.

As an example, laptops flat-lined for a decade or so at 1366x768 resolution with equally terrible everything. The Retina MacBook Pro jumpstarted the trend, but with the Surface line and hoards of employees buying them and using them on a daily basis, Microsoft finally got the message.

That's the main benefit.

(There's still a lot to be done on Windows with high DPI displays. Unfortunately, due to old software, it's a mess...)

As a Surface 3 (regular, not pro) owner, I've been brokenhearted by the lack of an update - the relatively low price for almost everything I need it for is amazing. The 3 is just a little underpowered, and my cover is looking kind of ragged these days, and I'd love to buy a refreshed version with a little more power. The form factor has just an amazing feel for portability - I walk a few blocks between work, home, and other work all the time, and the Surface is the perfect weight and size to grab and move around, moreso than anything I've ever tried...

I'm sure that it's a tricky balance with not pissing off their OEMs, and of course MS is understandably not interested in moving their massive ship towards becoming a major hardware company from an organizational management perspective. But, damn, they're good at it when they try, and it's frustrating that they make something awesome just to stop in a few years later.